A stronger US dollar, rising US Treasury yields, a weaker rupee and volatile crude prices are putting fresh pressure on Indian markets after a bruising September
BY PC Bureau
October 1, 2026: Indian equities entered October under renewed pressure, extending a September sell-off that had already wiped about 13% off the benchmark indices. On Thursday, the first trading day of the new month, the Sensex plunged more than 1,000 points and the Nifty fell below 22,300 as foreign investors continued to withdraw money from Indian stocks.
By around 1:45 pm, the total market capitalisation of BSE-listed companies had fallen from ₹4,71,86,292 crore at the open to ₹4,62,71,545 crore, wiping out roughly ₹9 lakh crore in a matter of hours. The selling came after foreign portfolio investors sold more than ₹10,000 crore of Indian equities on September 30 alone, taking their combined outflow over two sessions above ₹20,000 crore.
The pressure is not coming from a single source. A sharp rise in US Treasury yields, a weakening rupee, volatile crude prices and persistent foreign selling have combined to make Indian equities less attractive to global investors.
US yields raise pressure on emerging markets
The US 10-year Treasury yield rose to 5.34% on Thursday, its highest level since 2002. Higher US yields can draw global capital towards dollar-denominated assets because investors receive a higher return from US government securities while taking less emerging-market risk.
The move has also put pressure on the rupee, which fell to around ₹96.32 to the dollar. For a foreign investor, a falling rupee can reduce the dollar value of returns earned in Indian equities, creating another incentive to reduce exposure.
Oil has added another complication. Brent crude moved close to $100 a barrel amid supply concerns linked to the conflict involving Iran. For an oil-importing economy such as India, a sustained rise in crude prices can increase the import bill, put pressure on the currency and raise concerns about inflation and corporate margins.
India VIX: what it actually means
The sharp fall was accompanied by a rise in the India VIX, the market’s widely watched volatility gauge. India VIX jumped more than 12% to around 15.12 during Thursday’s sell-off.
India VIX does not measure how much the Nifty has already fallen. It measures how much volatility traders expect over the next 30 calendar days.
NSE calculates India VIX from prices and bid-ask quotes of Nifty options. In simple terms, investors buying options to protect themselves against large market moves push option prices higher; the implied volatility derived from those prices therefore rises. NSE describes India VIX as an annualised measure of expected volatility over the next 30 days.
So, if India VIX is at 15, it broadly corresponds to the market pricing in annualised volatility of about 15%. It does not mean the Nifty is expected to fall 15% in the next month. Rather, it signals that traders expect larger-than-normal price swings.
This is why VIX often rises during a sell-off. Investors rush to buy protection, option premiums rise and implied volatility increases. A rising VIX therefore tells us that uncertainty and demand for protection are increasing; it does not, by itself, predict whether the next major move will be up or down.
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The more striking story: India is lagging other emerging markets
The weakness in Indian equities becomes more significant when compared with the broader emerging-market universe.
The MSCI Emerging Markets Index had gained about 20.3% in dollar terms by early September, while the Nifty 50 had fallen sharply in rupee terms. The divergence is partly explained by the very different composition of the two markets.
The MSCI EM rally has been driven heavily by Taiwan and South Korea, where semiconductor and artificial-intelligence hardware companies have benefited from the global AI investment cycle. By the end of July, Taiwan accounted for about 26.6% of the MSCI EM index and South Korea about 20.3%, while India’s weight had fallen to 11.7%.
That is a major change from India’s position in 2024, when its weight in the emerging-market index was close to 20%. After the latest index changes, India’s weight was reported at about 11.3% in early September.
This matters because the MSCI EM number is not a verdict on emerging markets as a whole. It is increasingly reflecting the performance of semiconductor-heavy Asian markets. India’s economy may be growing strongly, but its stock market does not have the same exposure to the AI hardware boom that has lifted Taiwan and South Korea.
There is another important distinction. The MSCI EM performance is normally discussed in US-dollar terms, whereas the Nifty’s performance quoted for Indian investors is generally in rupee terms. Currency movements therefore affect the comparison. A weaker rupee makes Indian returns look worse to a dollar-based investor.
Valuation and foreign flows add to the divergence
India’s underperformance also reflects a change in foreign investor positioning. Foreign ownership of Indian equities has fallen sharply, while India’s weight in MSCI EM has declined. Reuters reported in August that foreign investors had sold more than $50 billion in Indian equities since October 2024 and that India’s share of the MSCI EM index had fallen from about 21% to below 12%.
At the same time, domestic investors have continued to provide support, particularly to mid- and small-cap stocks. That has produced a market in which the headline Nifty can look considerably weaker than parts of the broader domestic equity universe.
Eshaan Lazarus, founder and CEO of 021 Trade, said the Nifty 50 therefore does not tell the entire story for many retail investors.
“The Nifty 50 tells only part of the story. Nifty MIDSMALL400 index is just 5 to 6 per cent off its high,” he said, adding that SIP flows had increasingly moved towards mid- and small-cap stocks over the past five years.
He also pointed to the changing composition of India’s investor base. The NSE’s registered investor base more than tripled between the end of 2020 and 2025, meaning a large number of investors entered the market during years of strong returns.
“Those investors who have only experienced annual returns of 20 to 30 percent will find single-digit returns to be disappointing,” Lazarus said.
Why the divergence matters
The India-EM gap suggests that the current weakness cannot be explained simply by a global emerging-market sell-off.
Global money is rotating within emerging markets. Countries and companies benefiting from the AI and semiconductor investment cycle have attracted substantial capital, while India has faced a combination of currency weakness, foreign selling, relatively expensive valuations and weaker earnings momentum.
Fidelity International noted in September that global investors who had been overweight India two years earlier had moved to underweight, while India’s valuation premium relative to emerging markets had narrowed after a period of underperformance.
For India, therefore, the immediate issue is not merely whether the Nifty rebounds after a sharp fall. The bigger question is whether foreign investors again find Indian equities sufficiently attractive relative to other emerging markets.
For retail investors, meanwhile, Thursday’s sell-off is a reminder that the Nifty 50 is only one measure of the market. Mid- and small-cap stocks, currency movements, foreign flows and the composition of global emerging-market indices can produce very different experiences for individual portfolios.
Lazarus said investors should distinguish between a day’s market movement and the longer-term investment case. “In the long term, stocks are still worth looking at. The choice between selling or investing should not be based entirely on whether the market is down today.”
